Only an Adjustment Plan and Monetary Reform Can Stop Cuba’s Growing Fiscal Deficit

Prices in the markets follow an endless escalation that especially affects national products, such as beans. (14ymedio)

14ymedio bigger14ymedio, Madrid, 14 December 2023 — The increase in the fiscal deficit of 2023 by 44.4%, announced this Wednesday by the Cuban Government, arouses unfavorable comments from several independent economists, who regret the lack of a plan to fight against an inflation of 27% so far this year. According to the decree that modifies the State Budget, the deficit will reach 98 billion pesos instead of the 68,000 expected (4,083 and 2,833 million dollars, respectively, at the official exchange rate).

The public debt contracted for this year is set at just over 151 million pesos, around 6,296 million dollars, again taking into account the official change. This figure is, as explained by the Minister of Finance and Prices, Vladimir Regueiro, the sum of the deficit, the amortizations of debts that were due in 2023 and the “activation of letters of budgetary guarantees and other securities issued as a result of the monetary and financial order that corresponds to that year.”

“Although there are still no estimates of the 2023 Gross Domestic Product,” said economist Pedro Monreal in his X account, “it is likely that Cuba’s fiscal deficit would be close to 15% of GDP, which is terrible news and would confirm the persistence of an inflationary macroeconomic environment.”

The expert uses the figures of the last Statistical Yearbook of Cuba, which placed the national GDP at current prices in 2022 at 633,442 million pesos (26,393 million dollars). With those figures, the fiscal deficit would be 15.4%, although the Government contemplated a GDP growth for this year of 3%, which seems impossible to meet.

Monreal was aware of the decree’s content since the official press reported that this was one of the topics discussed in the Council of Ministers, since, he warned, it was clear evidence that the planned goal was not going to be achieved.

“The biggest deficit has been explained by resource limitations and effects on income raising, something that is usually the result of weaker economic growth than initially estimated. CEPAL (Economic Commission for Latin America and the Caribbean) predicted a growth of 1.8%, lower than in 2022 (2%),” Monreal stated.

The economist and professor at the Javeriana University of Cali (Colombia), Pavel Vidal, published an article aimed at analyzing the situation on the occasion of the announcement of the modification of the deficit. “Today it would be necessary to lower the fiscal deficit from 11 to 3% of GDP. Therefore, we are talking about a stabilization program that is much less drastic in budgetary terms than the one applied in the 90s, but a little more acute than that of 2009,” he wrote on Tuesday.

Vidal explains that the adjustment plan of the Fidel Castro Government during the Special Period included economic opening to tourism, remittances, foreign direct investment, self-employment and agricultural markets. “Much of the economic activity of the state sector was decentralized, and the tourism industry, nickel and other export items of primary goods were promoted,” he says.

Years later, he continues, during Raúl Castro’s mandate, “other partial reforms were introduced in agriculture, foreign investment and the private sector, and restrictions on housing and car markets, consumption and travel were eliminated.”

But on this occasion, Vidal urges, it is necessary to address an issue that has not been directly discussed: the exchange rate adjustment. “The unification of exchange rates and formal convertibility has to be a priority, because it is indispensable to reactivating productive activity, encouraging exports and the substitution of imports,” he says.

In his opinion, monetary reform must be faced – something that the authorities have announced for a long time but without specifiying the steps to be taken. It is essential to give access for agriculture and private businesses to the formal foreign exchange market, which is the only way to be able to “play a leading role in the economic reactivation and the substitution of imports.”

It is also necessary that State, mixed and foreign companies have a favorable exchange rate that motivates them and allows them to raise salaries and, of course, that allows Cubans, with guarantees, to invest abroad.

“Even the traditional allies of the Cuban government, such as Russia, China and Mexico, would like to see reforms and adjustments in the Cuban economy so that their credits and investments can generate a financially sustainable impact,” Vidal says.

In his article, full of proposals, he reminds the Government that it will hardly be able to improve the situation if it continues to “extract rents and decapitalize the few profitable state companies.” The economist calls for a strong adjustment that should not necessarily go through reducing spending on education, health and social assistance. “The availability of resources to serve these areas will depend on the ability to generate tax savings in other areas of budgeted activity, in the unproductive state business apparatus and in the policy of universal subsidies,” he adds.

“No organizational framework for the state company can be effective with the excessive scale presented today by this State] sector plagued by zombie organizations*. The corporate and budgeted State sector must be significantly resized if a real and sustainable solution to the fiscal deficit is to be found,” he concludes.

The recipe is somewhat related to the draft State company law, leaked last Monday, in which a mechanism inspired by the Chinese model was activated that includes the creation of a superministry called the National Institute of State Business Assets that will be at the head of all entities in the sector. In the Chinese case – which, for the moment is very different, due to the opening of the Asian country to a sui generis capitalist model – a similar institution led to a strong concentration and reduction of State companies.

However, this rule, which was to be approved in the next ordinary session of the National Assembly, seems to have been postponed, according to an official note from Parliament that outlined the issues that will be addressed and in which it was not included. “Cuba’s state enterprise law goes to the ’freezer’,” Monreal warned on social networks. If so, the reason is unknown.

*Translator’s note: “A Zombie Company is a corporate entity with very limited cash flows, only sufficient to pay the interest on the debt borrowed but not the principal amount of the loan. The revenue generated by the business operations only covers the fixed routine and operating costs, and thus a Zombie Company is dependent on the bank/government for its bailout.”

Translated by Regina Anavy


COLLABORATE WITH OUR WORKThe 14ymedio team is committed to practicing serious journalism that reflects Cuba’s reality in all its depth. Thank you for joining us on this long journey. We invite you to continue supporting us by becoming a member of 14ymedio now. Together we can continue transforming journalism in Cuba.